The Impact of Labor Taxes on Labor Supply

Policymakers face important questions about the optimal size and scope of federal spending. Labor taxes used to fund government programs provide citizens with important benefits, but at what point does taxation become a disincentive to working? How large is this effect? In his study, The Impact of Labor Taxes on Labor Supply (AEI Press, June 2010), Arizona State University economist Richard Rogerson attempts to answer these questions by comparing data from countries around the world over a fifty-year period. He finds that a 10 percent increase in labor taxes as a percentage of GDP leads to a 10 to 15 percent decrease in hours of work and that the unintended consequence of increasing taxes is a weakened revenue stream. These findings have enormous implications for policymakers who fail to account for this drop in government revenue when calculating the costs and benefits of expanding government programs.

At this AEI event, Rogerson discussed his work in a discussion with Harvard’s Robert Barro and Boston University’s Laurence Kotlikoff. Henry Olsen, vice president of AEI’s National Research Initiative, moderated.

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Robert Barro is the Paul M. Warburg Professor of Economics at Harvard University, a research fellow at the National Bureau of Economic Research, and a visiting scholar at AEI. Also a coeditor of Harvard’s Quarterly Journal of Economics, Mr. Barro has written extensively on macroeconomics and economic growth, and his research topics include empirical determinants of economic growth, the economic effects of public debt and budget deficits, and the formation of monetary policy. At AEI, Mr. Barro will be exploring the effects of the stimulus bill on the U.S. economy.

Laurence J. Kotlikoff is a William Fairfield Warren Professor and professor of economics at Boston University, a fellow of the American Academy of Arts and Sciences, a fellow of the Econometric Society, a research associate of the National Bureau of Economic Research, and president of Economic Security Planning Inc., a company specializing in financial planning software. He is author or coauthor of fourteen books and hundreds of professional journal articles. His most recent books are Jimmy Stewart Is Dead (John Wiley and Sons, 2010), Spend ‘Til the End (coauthored with Scott Burns, Simon & Schuster, 2008), The Healthcare Fix (MIT Press, 2007), and The Coming Generational Storm (coauthored with Scott Burns, MIT Press, 2004). His research interests include financial reform, personal finance, taxes, Social Security, health care, deficits, generational accounting, pensions, saving, and insurance.

Henry Olsen, a lawyer by training, is the director of AEI’s National Research Initiative. In that capacity, he identifies leading academics and public intellectuals who work in an aspect of domestic public policy and recruits them to visit or write for AEI. Mr. Olsen studies and writes about the policy and political implications of long-term trends in social, economic, and political thought.

Richard Rogerson is the Rondthaler Professor of Economics and a Regents’ Professor at the W. P. Carey School of Business at Arizona State University. Prior to joining the faculty at ASU, he was a professor of economics at the University of Pennsylvania, and he has also held faculty positions at the University of Rochester, New York University, Stanford University, and the University of Minnesota. His teaching and research interests are in the fields of labor economics and macroeconomics.